Legacy Wealth Weekly - Dec 2, 2016 (Last Hurrah for the CDN$)

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Weekly Market Wrap-Up: Hurrah for the CDN$?

The S&P/TSX and the S&P 500 have taken a pause this week. After all, both indexes are up ~2.5% since the Trump-election win so a little consolidation is welcome. Undoubtedly the highlight this week is the OPEC (-1.2MMbbl/d) and Non-OPEC (-0.6MMbbl/d) output cut agreement. This is beyond what oil experts expected. WTI has surged ~10% this week, pushing several energy stocks to 52-week highs. Higher oil prices sent bond yields higher initially but a somewhat soft US nonfarm payroll report prevented yields from pushing above the very important 2.5% resistance on US-10 year Treasuries. Some steam has also come out of the US$. Investors’ attention is now on the Italian referendum and the Austrian election being held this weekend. As we explained in the December issue of The Quantitative Strategist published this week, the Brexit and US election episodes makes it difficult to gauge which way the euro will go but since the worst-case scenario has rewarded risk assets so far, next week could well trigger a re-rating in the euro and European assets, which have lagged considerably this year.

Our focus this week is on the CDN$, which enjoyed a sizeable rebound (1.8%), thanks to OPEC and the surge in oil prices. Now a key question is whether this rally is temporary or just a flash in the pan. We have long held the view that despite stronger oil prices in 2017, oil prices would decouple owing to poor fiscal budget and trade balance fundamentals, monetary policy differentials and plunging Latin American currencies. Our view has not changed. As much as we referred to the 1997-1999 analogy to gauge ups and downs in oil prices this year, we believe the same playbook could be used for the CDN$. Looking at our Chart of the Week: while strength in oil prices could keep the CDN$ afloat a while longer, any rally should be sold aggressively. It is hard to know how much upside there is left to the Loonie ascension, but the 200-dma of ~76.50 cents should represent a stiff resistance.

Regarding economic statistics this week, in Canada, GDP growth rebounded to a positive 3.5% annualized rate in Q3/16 (from –1.3%), driven notably by energy exports. Also, the economy created 10.7k jobs last month, better than the anticipated (-20k). However, full-time jobs declined 8.7%. Speaking of jobs, in the US, nonfarm payrolls settled at 178k (vs. 175k exp.). The steep drop in the unemployment rate (to 4.6% from 4.9%) surprised markets but optimism was tempered by a reduction in the labour force participation rate. Looking at compensation, wage inflation fell 0.1% MoM (vs. +0.2% exp.) and slowed down to 2.5% YoY (from 2.8%). That being said, it is now incredibly hard to imagine what would stop the Fed from hiking its target rate in December. Indeed, PCE inflation accelerated to 1.4% YoY and the core index (1.7%) stands close to the Fed target. Moreover, personal income and spending advanced 0.6% and 0.3% MoM in October. Last, the mfg. ISM improved to 53.2 (from 51.9). Elsewhere, in Europe, headline and core inflation in November increased 0.6% YoY (from 0.5%) and 0.8% (from 0.7%). Meanwhile, economic activity prospects remain positive, with the Markit Mfg. PMI at 53.7. In Japan, retail sales recovered in October (-0.1% YoY, from -1.9%) and the Nikkei Mfg. PMI pushed higher (51.3, from 51.1). Unfortunately, momentum in China and India could be waning, with the mfg. PMIs declining to 50.9 and 52.3 respectively. This bears watching.

Next week, we await the Italian referendum and Austrian election results (Sunday), the trade balance in Canada and the ISM service in the US. Finally, in China, the trade balance and inflation are on deck.

The Canaccord Genuity research included in the Legacy Wealth Weekly is solely for Canadian residents. To subscribe to our weekly newsletter, click here.

Legacy Wealth Partners